Private equity firms to ‘go global’

Private equity firms to ‘go global’ in the face of slowing growth

Indonesia, Peru, Colombia and Turkey top list of new “high growth” markets where private equity is likely to see the most opportunities

Deal activity expected to slow in China and India

Foreign trade buyers seen as most likely exit route, notably those from Japan, China and Korea

Dramatic drop in fundraising confidence and economic outlook

Private equity firms around the world are bracing for tough conditions for both fundraising and deal-making, according to the 2012 Global Private Equity Report, released today by Grant Thornton. Now in its second year, the report is the result of 143 in-depth interviews with senior private equity practitioners around the globe.

The report provides insight into private equity general partners’ expectations for numerous aspects of the fundraising and investment cycle.

Fundraising fearsThis year’s report sees a marked decline in fundraising expectations of GPs around the world, with nearly three-quarters (72 percent) describing the fundraising outlook as either “negative” or “very negative”. In 2011, the figure was just 46 percent.

The most dramatic decline in optimism from 2011 is evident in the BRICS: Brazil, Russia, India, China and South Africa. This year, 78 percent of respondents in these markets described the fundraising outlook as “negative” or “very negative”. In 2011, the figure was 39 percent.

Private equity firms are expecting to have to turn to a greater number of new investors – or limited partners – and rely less on their existing LPs to make follow-on commitments to their next funds. This year, 40 percent of respondents said they expect their next fund to be majority funded by first time investors. In 2011’s report, this figure was only 24 percent. “Though fundraising remains a key challenge, for those firms with a successful track record, a coherent strategy and a quality team that can deliver that strategy, fundraising will be more straightforward. This evolution will see a widening of the gap between the successful and less successful firms and inevitably winners and losers in the industry, as raising funds for those underperforming firms becoming increasingly challenging, if not impossible,” said Martin Goddard, global service line leader, transactions, Grant Thornton Interntational.

Global exit routesPrivate equity firms are looking across borders for exit routes, in particular to overseas trade buyers. More than half of respondents (52 percent) expect the majority of the trade buyers they transact with in the near term to be foreign, while a further 20 percent expect the split between foreign and domestic buyers to be 50-50. Only 28 percent expect to deal mostly with domestic trade buyers.

Globally, China and Japan, Europe and North America are the regions from which most GPs expect non-domestic strategic buyers to originate.

“Of particular interest is the expected significance of Japan, reflecting the fact that the strong Yen coupled with sluggish domestic demand is encouraging international expansion. PEs globally expect to see Japanese buyers, and this is particularly the case in Europe, India and Asia Pacific.” – Global Private Equity Report 2012, Grant Thornton

Indonesia tops list of new “high growth” marketsPrivate equity firms based in high growth markets, such as those in Latin America, South Africa and the Asia Pacific, most frequently cited Indonesia when asked to identify foreign markets with the most potential for private equity investment.

“While growth in “high-growth” countries outstrips that seen in Western markets, the search for growth leaves local private equity firms to keep a watchful eye on where tomorrow’s dealflow will originate, particularly as some of their home markets show signs of overheating.

“Whereas a move to new unknown territories may be a risk too far for many Western funds, investors based in high-growth regions typically have good visibility of the next frontier markets within their region.” – Global Private Equity Report 2012, Grant Thornton

Economic sentiment worsensThe drive to harness growth is set against a backdrop of deteriorating sentiment around the global economy. Nearly half (48 percent) of this year’s respondents have either a negative or neutral economic outlook for their portfolio businesses. This compares unfavourably with last year’s survey, in which only 38 percent of respondents held these views.

“Even in some of the markets which have expanded rapidly over recent years, the speed of growth has slowed noticeably and practitioners are increasingly realising that these economies are not immune to the impacts of the global downturn.” – Global Private Equity Report 2012, Grant Thornton

Deal slowdown in China and IndiaWhile respondents globally expect private equity investment activity to increase over the coming year, expectations are more cautious than they were in 2011 and differ significantly from region to region.

New deal activity in Western Europe is widely expected to remain subdued, with only 27 percent of respondents predicting an increase in the next 12 months. This contrasts with North America, where 59 percent of respondents predict an increase, and MENA, where the figure is 60 percent.

There is enormous expectation for growing new deal activity in Latin America (78 percent expect this), which represents only a slight dampening of last year’s sentiment; in 2011, 89 percent of respondents expected deal activity to increase in the region.

Many private equity executives expect both China and India to suffer a decline in deal activity in the next 12 months. This represents a dramatic turnaround in sentiment for both countries. In 2011, 78 percent of respondents expected investment activity in India to increase, with the remaining 22 percent expecting it to remain steady. This year, 45 percent expect it to decline.

Sample and methodologyBetween July and September 2012, 143 interviews were conducted with top executives from private equity firms. Respondents included general partners in five principal regions/categories:

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